Fortescue backs out of shale gas deal

Resources reporter

Fortescue Metals Group has terminated a proposed deal that would have seen the company diversify into Western Australian shale gas.

Less than two months after shale minnow Oil Basin Limited claimed to have secured Fortescue as a cornerstone investor and new biggest shareholder, Oil Basins conceded on Tuesday that Fortescue had walked away from the proposal.

Cancellation of the proposed deal does not come as a massive surprise, given it was behind schedule and had attracted the attention of Australia's corporate regulator in relation to movements in the Oil Basins share price prior to it being announced.

When announced on November 15 the deal lifted Oil Basins share price by about 35 per cent, as it appeared to represent a major coup for the tiny company to pair with a big company like Fortescue.

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Worth just $4.2 million, the deal was financially trivial to Fortescue, but loomed as a symbolically significant diversification beyond iron ore.

In the original announcement, Oil Basins said the deal was non-binding, but was expected to be finalised within five business days.

"Oil Basins Limited ... is pleased to advise the Australian Stock Exchange that it has secured a strategic cornerstone investment in the company by Fortescue Metals Group," said the first paragraph of the original statement to the ASX.

Later that day when Fortescue finally commented on the news, the iron ore miner appeared more circumspect.

''Fortescue's existing operations use a large amount of energy in the form of diesel and potentially natural gas. It is appropriate that we consider our long-term energy requirements ... If we do finalise an agreement with Oil Basins, this modest investment would form part of this strategy,'' said a Fortescue spokeswoman.

Suspicions that the deal may not go ahead started to grow when it was not finalised within five business days as flagged by Oil Basins.

Finally today, Oil Basins released a statement to the ASX confirming that Fortescue would not become its cornerstone investor.

"OBL advises that on 14 January 2013, discussions on the letter of intent were terminated by Fortescue," said the statement from Oil Basins chief executive Neil Doyle.

Oil Basins claimed that Fortescue remained interested in acquiring some acreage in the area - known as Derby Block - should it be awarded to Oil Basins by the WA Mining Minister.

Fortescue shares were 1.9 per cent lower at $4.63, while Oil Basins remained in a trading halt.